FORMER Treasury secretary Ken Henry has warned Australia will have to lift the GST and the Abbott government can’t afford its big ticket social policies, like the Paid Parental Leave scheme, given the current state of the books.

Exactly two months out from the May budget, Mr Henry believes the country is facing an “imminent crisis”, unless the tax system is comprehensively reformed.

“We cannot afford new social policies with the current revenue base,” Mr Henry told ABC.

“If the present revenue system isn’t capable of funding those programs, are there alternative government spending programs that can be cut to make way for the new programs?”

“That’s a very big question and I have serious doubts about that, by the way,” he argued.

“And if that’s not the case, then are there alternative revenue sources that one can turn to in order to finance those programs?”

His warning comes after former Treasurer Peter Costello reportedly told Joe Hockey the PPL scheme was too expensive at this time, according to the Financial Review.

The Prime Minister, who regards the Paid Parental Leave Scheme as his signature policy, conceded he has to get over the hurdle of getting it through Parliament.

“Sometimes things have to be negotiated,” Mr Abbott admitted to 5AA Radio.

“But as far as I’m concerned the scheme that we took to the election is the scheme that we should take into the Parliament and try our hardest to get passed,” he said.

“I regard this as an economic reform not as a just a welfare benefit.”

Mr Abbott insisted the scheme would be “fully funded”, by a levy on the nation’s largest companies.

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The PM later insisted Mr Henry is a “distinguished” former Treasury Secretary.

“He deserves to be listened to with respect,” Mr Abbott told reporters during a visit to South Australia.

“But they’re just private views of a private citizen.

“We have a tax reform program and tax reform begins with repeal of the carbon tax, repeal of the mining tax, reduction of the company tax. These are the tax reforms that are currently before the Senate.”

Mr Abbott urged Labor “to stop siding with the Greens and against the people” and to “let the government get on with the job”.

Liberal backbencher Alex Hawke, who has publicly voiced his opposition to the proposed scheme during the current economic circumstances, said scaling it back would help.

“I think any savings in the current budgetary environment would be welcome,” the MP told Sky News.

“Whatever that size of those would be I think they’d be welcome.”

He agreed with Mr Abbott that talks would need to be held with the Greens and minor party’s about the scheme’s passage through the Upper House.

“I think the Prime Minister is right, I mean obviously this has to be negotiated through the Senate if it is to get through,” he said.

Mr Hawke penned an article for the Institute of Public Affairs last May, criticising his party for pushing ahead with the plan.

“An expansion of the PPL scheme is ill suited to an economically Liberal agenda. Most importantly for Australians, the policy does not pass the fair go test,” he wrote.

Mr Henry conceded it is inevitable the GST will have to be changed, not only for the federal budget, but also for the states and territories.

“At some stage the GST rate will be raised,” he insisted.

“Raising the GST rate one day will be seen as necessary to underpin fiscal sustainability.”

But the former Treasury head admitted there is no need for an immediate rise in the rate on its own, without other tax reforms.

“Should it be raised now? That’s the question.”

The Abbott government has promised to deliver a white paper on tax reform during this term, with any major changes put to voters at the next election.

Mr Henry urged the Coalition to take another look at recommendations he made in his 2010 review.

His call for a shake-up of the tax system has the support of Shadow Treasurer Chris Bowen.

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